Ethanol Uncertainty

Q. What happened with the elimination of some ethanol subsidies at the end of 2011?

Rick Kment: What we saw at the end of 2011 was the dropping of the blenders’ credit. A lot of people assume that this credit went to producers, but it actually was a tool for use by those blending ethanol and gasoline, most often the petroleum companies. It was designed to be used at the discretion of the blender to keep ethanol competitive in the market back when overall production of ethanol was ramping up to meet demand. If supplies were tight it gave blenders the flexibility to offer a premium for ethanol to incentivize producers to make more. Conversely, if product supplies were adequate or building up, that credit could be applied to the back end to reduce the price of the blended fuel.

I don’t think the credit had a significant impact in overall production or demand, but last year there was a belief by many that killing the blenders’ credit would make a significant impact on ethanol production.

Q. What is driving the ethanol market now?

RK: What has really affected and continues to affect overall ethanol use on a domestic level is the renewable fuel standard (RFS) level. That was developed through the 2007 Energy Bill and it really moved the fuel market overall to focus not only on corn ethanol but to more advanced technologies such as cellulosic ethanol. The RFS mandate end game is 36 billion gallons by the year 2022, with a cap of 15 billion gallons of corn ethanol from 2015 forward. The balance is supposed to come from cellulosic sources, but that level has continued to be readjusted to a lower level due to the lack of commercial production of cellulosic ethanol to date.

Looking beyond the next two years, the incentives to move toward cellulosic ethanol production are substantial, but through 2020 we believe that the majority of ethanol will continue to be derived through corn and grain.

Q. How is ethanol policy setting up politically?

RK: It’s really still too early to tell how the politics will shape up this year, it’s really a wild card. It has a lot to do with the economy, the political atmosphere with the election coming up — we have seen that statements by political candidates with a negative view of ethanol, in particular in Iowa, create a negative fervor with the electorate.

I do think that, with the blenders credit now gone, we’ll see more political pressure focused on changing the RFS. That would have a much more significant impact on the industry than we could imagine the blenders’ credit having. RFS levels will be the next battle point, as policy makers try to figure out where it fits in the long term structure of the energy bill and energy usage in the U.S.

Q. Are any changes in ethanol policy imminent?

RK: In the near term we don’t expect any resolution in the biofuel debate. What’s interesting is that really every segment of energy is on the hot seat right now, from ethanol to gasoline to cellulosic to virtually all sources of renewable energy. Overall it is a political and economic mine field to champion any segment of energy – its emotionally charged and each touches on aspects of life such as safety, the economy and the food supply, in addition to energy that has nothing to do with how we power our cars.

The rallying cry in the ethanol industry is about fairness. You hear it throughout the national association that it’s not fair to take away the subsidy from us without leveling the playing field and taking subsidies away from others as well. That is a message that has been heard by the legislators that are looking for ways to cut government spending. From natural gas companies to oil importers and refineries, even down to solar and wind, there is more and more focus on what is going to be cut. I’m not saying it’s right or wrong, but that is the mentality being taken at this point.

Q. How are overseas markets impacting the ethanol industry domestically?

RK: Domestic stocks of ethanol continued to grow from December through early February. On Feb. 3, the level was at 21 million barrels, up almost 8% over a year ago. There is less demand for exports going to Brazil because we have less of a tight supply in corn and an expected strong sugar cane crop – we did not see this last year when ethanol was exported in record quantities to Brazil. If overall supplies continue to build and demand for gasoline and ethanol remains slow, it could keep the ethanol market sluggish the first half of the year.

Q. What is production looking like this year?

RK: Production is 2.5% above last year of this same time, but that could change significantly if corn continues to stay at $6.50 to $7.00 and we maintain burdensome levels of supply. We don’t see a market upheaval like three or four years ago, but there will be some rewinding in the market. We’re getting reports that big players like ADM will make cuts in processing. Even small changes of 1% or 2% could have substantial short to intermediate term effects on grain and ethanol prices in 2012.

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